Property Investment – Part 1 – Know Your Borrowing Potential
Starting out on the journey of property investment is an exciting yet significant step. However, before diving into the world of real estate, it’s really important to have a solid understanding of finance. But if you’re like most people looking to buy their first investment property, the whole thing can be super confusing and overwhelming.
That is why, I’m going to break down the steps to investing in property, starting with working out how much you can borrow.
How Much Can I Borrow?
One of the fundamental questions prospective property investors ask is, “How much can I borrow?” Your borrowing capacity depends on various factors, including your income, expenses, existing debts, and credit history. Typically, lenders allow you to borrow up to 80% of the property’s value, requiring a minimum 20% deposit. Additionally, demonstrating a stable income and employment history is vital to qualify for a loan.
Could I Borrow More?
While the standard borrowing limit is 80% of the property value, some investors may wonder if they could borrow more. In certain circumstances, such as having a substantial deposit, impeccable credit history, a diversified investment portfolio, and a highly desirable investment property, borrowers may qualify for loans of 85-95% of the property value. However, securing such loans requires presenting a strong case to the lender, emphasizing financial stability and the property’s potential for growth.
What is Lenders Mortgage Insurance (LMI)?
Lenders Mortgage Insurance (LMI) is a common term in the realm of property investment. It’s insurance that lenders require when borrowers have less than a 20% deposit. LMI protects the lender in case the borrower defaults on the loan, allowing borrowers to access loans with a smaller deposit. It’s important to note that LMI, along with stamp duty and GST, are typically included in the total loan amount, increasing the overall borrowing cost for the investor.
How Do I Qualify For A Property Investment Loan?
Qualifying for an investment loan involves meeting specific criteria set by lenders. These criteria include having a sufficient deposit (typically 20% of the property’s purchase price), maintaining a clean credit history with a good credit rating, demonstrating the ability to service the loan through stable income and employment, and providing evidence of genuine savings over the past six months. Meeting these requirements increases your chances of securing a favorable investment loan.
Understanding Equity
Equity plays a crucial role in property investment and wealth creation. It refers to the difference between the current market value of your property and the outstanding balance of your mortgage. As you pay down your mortgage and property values appreciate, your equity grows. This equity can then be leveraged to purchase additional investment properties or fund other financial endeavors.
Useable Equity
Banks typically lend up to 80% of the value of your property, minus the outstanding debt. This portion of your equity is considered “useable equity” and can be used as a deposit for purchasing additional properties. Calculating your useable equity allows you to determine your borrowing capacity and potential investment opportunities.
Deciding Your Investment Strategy
Before diving into property investment, it’s essential to develop a clear investment strategy tailored to your financial goals and risk tolerance. Consulting with professionals such as financial advisers, accountants, mortgage brokers and Real Estate Specialists can provide valuable insights and guidance in devising the most suitable investment approach. Whether you opt for capital growth, rental yield, or a combination of both, having a well-defined strategy sets the foundation for a successful investment journey.
Understanding the finance side of things is crucial when you’re starting out on your property investment journey. From determining borrowing capacity to leveraging equity and devising investment strategies, having a financial understanding is the difference between a successful investment, or a whole load of unwanted stress. Hopefully this will give you the confidence you need to get started today!
If you’re looking for a lender who will really look after you I am happy to recommend who I use personally. Contact me and I’ll pass on her details so you can have an obligation free chat!
Keep an eye out here for the next step – Part 2 – where you’ll learn all about the costs involved and tax benefits associated with owning investment property.
